The Effect of Managerial Overconfidence on Profit Smoothing Evidence from Tehran Stock Exchange

Abstract

The purpose of this research is to review the effect of overconfidence on profit smoothing in three macro industries: vehicle and parts manufacturing, chemical products and medicinal materials and products in Tehran stock exchange. Time period of this research is 2006-2012 and a number of 56 companies (22 vehicle companies, 13 chemical companies, and 21 medicinal companies) were chosen as sample. Binary logit multi-variable regression models were used to analyze research data in mentioned industries in Eviews 6 software. In this research, profit smoothing is considered as dependent variable, managerial overconfidence as independent variable, and also some control variables effective on profit smoothing such as return on assets, financial leverage, and company size, have been used.

The findings indicate that managerial overconfidence has no effect on profit smoothing in the companies which are being reviewed. Moreover, in medicinal materials and products industry, the effect of company size on profit smoothing has been positive and significant, and the effect of return on assets on profit smoothing has been negative and significant.

Keywords: managerial overconfidence, profit smoothing, and quoted companies in stock exchange.